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Hello fellow Dividend allocators,
I bring you my highly concentrated portfolio built specifically for one thing and that alone, a recovery in oil, not a boom, just a recovery.
I have for a while now gotten increasingly skeptical about the sustainability of the overall US stock market and as such I've been seeking out the most out of favor sectors, looking for value far removed from the booming valuations of the US mega-caps/ hyper-scalers.
That brought me to a few different sectors, namely chemicals, real estate and energy, particularly traditional energy such as oil and gas, coal has already been on quite the run.
Of the sectors I identified as 'out-of-favor', chemicals seemed the hardest hit due to the enormous oversupply and undercutting coming out of China, for that reason I chose to pass on chemicals for now. Next up was real estate and while the sector does have certain names that could qualify as deep value or highly asymmetrical in their risk/reward profiles, the sector as a whole didn't seem to offer the deeply favorable odds I look for when I wanna go big on something, I like to utilize a number/style approach of waiting around until the right pitch comes and then swinging for the fences. That brought me to energy and at first it wasn't hard to see why people hated energy everywhere I looked, market participants were talking about a glut, particularly a glut of oil. Taking the consensus at face value you would have thought the industry was about to pay people to take their oil given the absolute worst of the pandemic lockdowns. A few dissident however seemed to have the facts on their side, they would argue that oil glut seemed to only exist on paper, it was the product of overestimated future supply and underestimated future demand. In my view the market has clearly sided on the side of the glut narrative and as such the stock prices of producers had fallen severely, this made like an opportunity for a very asymmetrical trade, if the optimists were right, the stock prices of particularly the smaller producers and those with elevated leverage, should re-rate meaningfully higher, all while offering a possible hedge against geopolitical uncertainty which has been raising since the start of the second Trump administration.
The Trade is still early but a meaningful rebound in crude oil and natural gas prices, although the former has more to do with weather, alongside a shift in the sentimental around investment in the industry, signals to me a shift away from the glut narrative being in the driver seat and the narrative around historic low market allocation into energy stocks and this asymmetric risk/reward, taking over.
My portfolio is mainly focused on the small/mid-cap E&P names as this is where I see the most asymmetric setups and this bucket I have companies across a spectrum of low to high(er) leverage profiles. Following the E&P names I have O&G names, here my basket is extremely concentrated on one theme, offshore, as this is by far the most asymmetrical O&G niche, they're the purest in terms of boom and bust and I'm obviously betting big on a boom. Previously I held some onshore names related to broad OFS and some more specialized names related to Valves, pipes and cracking but I traded those in for more E&P exposure, leaving only the offshore names in my OFS basket. Next up is the infrastructure names, here I only hold two names, FAI Infrastructure and New Fortress Energy, both are extremely leveraged with FAI Infrastructure needing to refinance leverage and NFE struggling to find accretive restructuring after failing to make interest payments on its debt. The midstream basket is by far my highest risk basket and this I've kept its overall allocation small. Lastly I have an allocation towards shipping, this is made up mostly by tanker stocks but also a small bet on dry bulk. The shipping basket is a bet on continued elevated geopolitical uncertainty, call it my war risk insurance, the two shipping segments also both have favorable supply dynamics that could support prices, particularly if world governments get serious about enforcement against the shadow fleet of nations such as Russia and Iran, recent enforcement from both the US and EU are supportive of this narrative.
I would love to hear your thoughts on my highly concentrated portfolio.
I know it's an atypical portfolio and one that carries a higher risk and I'm comfortable with that.